7 Banks Stocks to Buy After the BB&T-Suntrust Mega-Merger

While it's still early, 2019 is shaping up to be a huge year for mergers. January brought several huge deals in the pharma and biotech space. Now, just a week into February, we've got another big one, this time in the world of bank stocks. On Thursday morning, BB&T (NYSE: BBT ) announced that it is acquiring SunTrust (NYSE: STI ) in a $66 billion all-stock transaction .

The combined entity, should the deal be approved, will be the sixth largest bank in the U.S. based on both assets and deposits. Two former large regional banks will now be weighty enough to compete with the household name too-big-too-fail banks. This deal is likely to accelerate a wave of consolidation already in progress across the banking space.

The U.S. has way more banks per capita than most other developed countries. This creates a ton of redundant costs that can reduced through mergers. Particularly with the rising cost of technology as banks go digital, it make senses for smaller players to combine forces. Even on a nasty day for the market, many banking shares were in the green Thursday, as analysts ponder which banks will get acquired next. Here are seven bank stocks to have at the top of your radar with the sector back in focus thanks to BB&T.

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Bank Stocks To Buy: Huntington Bancshares (HBAN)

Huntington Bancshares (NASDAQ: HBAN ) was one of the biggest winners on the stock market Thursday, with shares up 4%. That makes sense. If you were guessing which bank gets acquired next following SunTrust, Huntington is a logical pick.

At more than $72 billion in assets, Huntington would give any potential acquirer a major new source of deposits and loans. And the valuation looks great. HBAN stock is currently trading at just 10x forward earnings. Incredibly, just last month, HBAN stock was selling at under 8x forward earnings. Investors have really shunned the banking sector.

That creates the opportunity. As we saw with SunTrust, banking executives see the values in this sector and are swooping in with opportunistic bids. Huntington may be the next to go. Due to its larger than average exposure to auto and RV loans, some investors have shunned the bank with the auto cycle on the downswing. But Huntington is a large franchise and doesn't deserve much of a discount simply for that. As it is, HBAN stock, should it remain independent, yielded more than 4% for buyers yesterday.

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Bank Stocks To Buy: Chemical Financial (CHFC)

BB&T and SunTrust aren't the only regional banks making merger moves. Though Chemical Financial (NASDAQ: CHFC ) isn't quite in the same league as those two, it is still a major player in the Midwest. And it recently announced a merger-of-equals with its peer TCF Financial (NYSE: TCF ).

The combined entity looks rather interesting for bank stock investors. For starters, the new bank, which will retain the Chemical name, will be the 9th biggest bank in the Midwest, with $45 billion in assets. Compared to the old standalone banks, the combined entity will see 17% EPS gains (compared to old Chemical) and 31% EPS accretion (compared with standalone TCF).

The banks estimate that they will save $142 million annually in after-tax cost synergies, which is worth something close to $1.5 billion in market cap assuming an 11x P/E ratio (itself conservative) for the combined entity. That should add a ton of value to the new CHFC stock, which is still trading at a sub-$7 billion market cap, assuming the deal goes through as currently proposed. CHFC stock also offers a reasonable 3.0% dividend yield at the moment.

Shareholders of the current TCF stock will receive 0.5081 shares of CHFC stock for each TCF share they own at the merger date. At this time, TCF stock trades at a 1% discount to its post-merger price making it slightly more attractive for new buyers. For those curious, the reason that I own CHFC stock rather than TCF at present is that I already had a position prior to the deal announcement.

Bank Stocks To Buy: New York Community Bancorp (NYCB)

New York Community Bancorp (NYSE: NYCB ) has been a great turnaround story over the past two months. When I last mentioned it as a safe dividend stock to buy, it was trading at $8.94. Since then, NYCB stock has shot up to $12. Regardless of the recent run, I'm sticking with NYCB stock. So is UBS, who upgraded the stock earlier this week and raised their price target from $10 to $15 per share.

$15 seems reasonable indeed. Here at $12, NYCB stock is still trading merely at book value and yielding more than 5.5%. That makes it one of the top yielding big banks in the country. It also has an ultra-safe loan book primarily consisting of low loan-to-value credits on New York City multi-family housing. Historically, while yields on these loans are less than in other areas, they almost never face serious losses. During 2008, NYCB remained profitable and held its dividend despite the carnage elsewhere.

Like other stocks on this list, New York Community Bancorp makes a logical acquisition target. At just book value, an acquirer can easily step in and pay a healthy premium while still getting a fair deal. New York Community's $52 billion asset base is certainly large enough to move the needle for other banks wanting a bigger presence in the NYC metro area. And New York Community's longtime CEO is getting up there in years and has shown an interest in M&A activity; he seems willing to do a deal if the price is right.

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Bank Stocks To Buy: Zions Bancorp (ZION)

Hailing from Salt Lake City, Zions Bancorp (NASDAQ: ZION ) is one of the big independent Rocky-Mountain-centered regional banking firms. With more than $65 billion in assets, Zions would be a large enough M&A target to attract interest from most of the national banks.

Zions picked up a lackluster reputation during the financial crisis. While it didn't come close to the brink of failure, it struggled more than many other regional banks. However, I'd argue that this reputation is no longer deserved. The bank has stepped up its operations rather nicely since the financial crisis and now has an appealing loan book.

Zions, unlike many regional banks, makes the majority of its loans to commercial enterprises, rather than traditional mortgages and consumer credit. This gives Zions a lot more exposure to changing interest rates as their loan book resets faster as rates rise. If you're bullish on the economy and expect more rate hikes, Zions is well-positioned to profit.

At $49 per share, ZION stock is selling at around 11x earnings. That's quite cheap, particularly as earnings could exceed expectations if rates keep rising. It also makes an attractive acquisition target. Zions has long had excessive overhead costs compared to their revenues. Some of this is due to their different client base from other banks, but arguably a lot of it is bloat. An acquirer should be able to cut costs, picking up a highly profitable operation after realizing merger synergies.

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Bank Stocks To Buy: PacWest Bancorp (PACW)

Moving further west, we find Los Angeles-based PacWest Bancorp (NASDAQ: PACW ). This one has quite a few similarities to Zions. PacWest also struggled during the financial crisis - and with good reason as California had more than its shares of trouble in 2008. However, PacWest has bounced back strongly and now offers investors a compelling story.

The PacWest story has two key elements. For one, PacWest is a niche lender. Like Zions, it doesn't have the majority of its business in residential markets. Instead, it focuses on a variety of more specialized lending such as factoring, venture capital loans, land and construction loans and so on. These are higher-risk, to be certain, but they also come with much higher yields. In a strong economy - like the U.S. has now - PacWest is making huge returns on its assets compared to peers.

PacWest shares those benefits with its shareholders. The company has long paid a generous dividend, and the yield currently exceeds 6%. PACW stock sank much more than the sector as a whole in late 2018 as investors sized up recession risk and dumped the most exposed banks such as PacWest. However, if the nay-sayers are wrong and the economy stays strong, PACW stock could have easy 40% upside here -back to its 2018 highs. On top of that, if PacWest stock stays down, it could attract a takeover bid from a larger bank that could roll its niche lending portfolio into a broader and more diversified loan book.

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Bank Stocks To Buy: People's United Financial (PBCT)

If you're looking for a safer choice than those more aggressive western banks, People's United Financial (NASDAQ: PBCT ) could be a better option for your portfolio. The bank operates primarily in wealthier parts of the Northeast such as Connecticut and Rhode Island. It just launched another acquisition to expand its presence in the high-end suburbs around Boston. When you combine conservative loan underwriting with wealthy clients, you get a loan book that can withstand almost all shocks. During the 2008 financial crisis, People's United suffered negligible losses, remained strongly profitable, and continued hiking its dividends.

People's United isn't a household name yet, but it is quite large, coming in with $36 billion in loans at the end of 2018. That makes it sufficiently large to attract interest from an M&A suitor that wants to expand its presence in desirable Northeastern markets.

If People's United remains independent, it is a great stock for growth and income investors. Even with the recent rally, PBCT stock yields more than 4%. The company has also hiked its dividend each year since 1995, including during 2008. That means it will likely become a Dividend Aristocrat, a company that has hiked 25 years in a row, starting in 2020. That would attract a new class of investors into the stock. On top of that, selling at less than 12x earnings, this conservative holding is priced nicely.

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Bank Stocks To Buy: Citigroup (C)

While most of the bank stocks on this list are acquisition targets, it's worth throwing in one of the too-big-to-fail banks as well. Why is that? They don't seem like direct beneficiaries of smaller banks merging? That may be true, but consolidation should be a rising tide that helps all parties. As you have fewer and fewer big regional banks, the deposit share for the remaining big banks should keep rising. That leaves firms like Citigroup (NYSE: C ) with a national deposit base in great shape.

You can make a case for several of the national banks as being attractive here. On a valuation basis, however, Citigroup still looks like the most compelling of those with large deposit franchises. That value case starts with the company's robust earnings. C stock is trading at just 9.5x trailing and 7.4x forward earnings.

Incredibly, analysts see earnings growing 15% this year and 16% per-year over the next five years. Yet the stock is trading for peanuts. To be clear, this is a $63 stock expected to earn just shy of $9 a share in 2019 and close to $10 of EPS in 2020. It also pays a nearly 3% dividend. You have to think a major recession is on the way for this pricing to make any sense. The ongoing consolidation trend only serves as another valuation driver for an already really cheap stock.

At the time of this writing, Ian Bezek owned CHFC, NYCB, PACW, and PBCT stock. You can reach him on Twitter at @irbezek.